The Powers and Duties of Trustees
The Powers and Duties of Trustees...
The Powers and Duties of Trustees
The trustee cannot deal with the property as his own because even though he may have legal title to the trust property, real entitlement rests with the beneficiaries. Trustees’ actions are, therefore, policed and controlled and the parameters of the trustee’s duties and powers are closely regulated. The rights and responsibilities of the trustee are as prescribed by the trust instrument, imposed by equity and set out in statutory form. The extent of a trustee’s duties also varies according to the nature of the trust e.g. whether it is a CT, a bare trust or a pension trust. The more onerous duties fall upon the trustee of an express trust. The failure to discharge the duties of trusteeship may mean that the trustee will incur personal liability to the beneficiaries. Millet L.J. Armitage v Nurse – “there is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts” “ The duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries is the minimum necessary to give substance to the trusts” The trustee’s duties may be divided into 3 categories: (1) General Duties The general duties owed by a trustee in relation to the running of the trust (i.e. the administrative and managerial obligations). o Trustee must both hold and deal with the property in a fashion that furthers and protects the interests of the present and future beneficiaries – overarching duty = to administer the trust for the benefit of all the beneficiaries. o In doing so, the trustee must act impartially and in the best interest of all the beneficiaries – requires that trustee manage the trust in a way that safeguards the capital value of the property and generates an income for the beneficiaries – the trustee is able to employ agents (e.g. an accountant or a solicitor) to carry out key administrative tasks. (2) Fiduciary Duties The fiduciary duties automatically arise from the relationship of trustee and beneficiary. o As all trustees stand in a fiduciary relationship with the beneficiaries (which entails that the trustee must always act in utmost good faith), an obligation of loyalty and faithfulness is expected of the trustee. o The trustee is not, therefore, permitted to advance the interests of one beneficiary at the expense of another or profit from his position as trustee or to place himself in a position where his interests conflict with those of the trust. (3) The distributive or dispositive obligations of the trustee o This duty concerns the distribution of capital and income in favour of the beneficiaries. o The trustee will have to dispose of the trust property according to the directions of the settlor and must not distribute trust money to someone who is not entitles. o If the trust is discretionary, the trustee must exercise his discretion sensibly and responsibly while taking on board relevant matters and disregarding irrelevant concerns.
The Trustee’s Duty of Care Each trustee has a duty of care (i.e. to avoid loss and injury resulting from their conduct in relation to the trust). At common law, unpaid (i.e. amateur) trustees were required to utilise such due diligence and care as would be expected of an ordinary prudent man of business (Speight v Gaunt). A higher expectation, however, operated in relation to the duty to invest – “the duty is to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide” (Re Whitely ) –approach prevents trustees from engaging in speculative investment.
Paid (i.e. professional) trustees and corporate trustees = additional and higher standard of care – judged by standards they professed and which had led to their employment as trustees. Objective standard applicable at common law depended upon the presence of payment, the nature of the trustee and the special skills that he claimed (Bray v Ford) – not the most straightforward test to employ and took no account of the subjective standard that the trustees would actually have adopted in relation to his own affairs. Common law duty of care replaced by Trustee Act 200 which imposes a new duty of care on trustees. This new duty applies to the activities carried out by the trustees as listed in Sch.1. Ambition was to produce a uniform duty that would apply across the spectrum of trustees’ duties and, thereby, instil more certainty and consistency into the regulation of the trustee’s behaviour. The listed activities include, for example, the making of investments, the acquisition of land, the employment of agents, the taking out of insurance, the carrying of the valuations of the trust property and beneficial interests and the auditing of trust accounts. This prescription, therefore, encompasses all of the trustee’s key functions. The list is not, however, exhaustive and omits reference to a trustee’s functions concerning the custody and management of trust property other than land and the commencement and defence of legal proceedings by or against the trust. Where a few activities are not listed, the common law yardstick will still operate. The statutory duty can be excluded and in such cases the common law duty will be reactivated. Subject to exclusion by the trust instrument, s1(1) lends the objective with the subjective. It requires a trustee to ‘exercise such care and skill as is reasonable in the circumstances’. In determining what is reasonable, particular regard in to be had to: o Any special knowledge or experience that he has or holds himself put as having – the personal characteristics of a trustee can assume relevance. The standard is geared not only to the expertise that the trustee actually has, but it also reflects the expertise that the trustee claims to have. The claim must somehow have been communicated to the settlor, an appointing trustee or the beneficiaries. The claim could emerge from conversation, publicity material, advertisements and the like; and o Whether the trustee acts in the course of a business or profession and, if so, any special knowledge or experience reasonable expected of such a person in the same business or profession. This must entail that a higher standard of care is expected from paid trustee who specialises in trust work that from, say, an accountant or a solicitor who acts as a trustee as part of his general practice. Provided that the trustee crosses the minimum threshold applicable, he will not be liable for subsequent loss that occurs. The trustee is able to apply to the High Court for directions prior to the taking of any act that might compromise his position as trustee. If the trustee does not take such pre-emptive action, it is still possible to apply to the court for relief under s.61 Trustee Act 1925. This enables the court to exonerate (in whole or in part) a trustee who has acted honestly and reasonably and who ought fairly to be excused for the breach and the failure to obtain directions of the court. Case law demonstrates that an unpaid trustee is more likely to be released from liability than his professional counterpart.
Trustee’s duty when investing Trustee Act 2000 – modelled upon common law test. Requirement is that the trustee must behave like a prudent person acting for others when making investments, reviewing investments and obtaining investment advice. This can, however, be excluded or modified in the trust instrument. The contemporary approach is as advocated by Hoffman J in Nestle v National Westminster Bank and is that modern trustees are entitled to be judged by the standards of the ‘portfolio theory. Trustee’s duty to collect in the assets Safeguarding trust property If the trust was in existence before his appointment, a new trustee must ensure that he understands the provisions of the trust and that the trust property has been properly invested. Hence, if a trust investment has fallen in value and threatens to jeopardise the
trust fund, the trustee should consider whether to reinvest elsewhere otherwise he will be liable for the failure to review – Re Medland. Except where expressly allowed in the trust instrument, the trustee should never lend trust money or allow it to remain outstanding on an unsecured basis -Pickard v Anderson. If the trust property into chattels, the trustee should also obtain an accurate inventory. The trustee is expected to ensure that all securities and chattels are in safe custody – Re Miller’s Deed Trusts . Land - the trustee should ensure that it is secure and free from the adverse claims of a trespasser. There appears to be NO DUTY TO INSURE the trust property (RCC v Peter Clay Discretionary Trust )
TRUSTEES’ POWERS/ DUTY TO INVEST
The investment of trust funds is a major aspect of the administration of trusts and will be a feature of all but the lost primitive of trusts. If the subject matter of the trust is money the trustee will be under a duty to invest the trust fund to the advantage of the beneficiaries. Investment is an attractive option as it should shield that trust fund from the depreciating effects of inflation. Investment of capital should also ensure that there is an income stream from which interim payments can be made to the beneficiaries (which is especially pertinent where there is a beneficiary who enjoys merely a life interest). Although there is usually a duty to invest the trustee is not given an unbridled ability to invest as he wishes, the choice of investment is governed by administrative powers to invest. The power is subject to regulation by Parliament, the courts and the trust instrument. The first port of call is to examine the trust instrument – in many contemporary trusts there will be found an express investment clause. This will reflect the vision of the settlor as to how the trust property is to be invested for the better advantage of the beneficiaries. If no express power of investment is contained in the trust instrument, the trustee is given a statutory power to invest which is now to be found in the Trustee Act 2000.
Express powers Common practice = insert an express investment clause into the trust instrument- may operate to narrow the field of investments opens to a trustee or broaden the choice beyond that which is permissible under statute(usually this) – for example, such a clause might allow the trustees, “to invest in or upon such investments as to them might seem fit and as is they were the absolute owners of the fund” – offers the trustees the utmost flexibility as to how and where they may invest trust money but this does not give a trustee the right to do exactly what he wishes. The trustee remains subject to the general duty to take care and the other duties imposed by Trustee Act 2000 An express power must be carefully drafted so as to be clear, understandable and capable of enforcement (e.g. Re Kolb’s WT where a provision allowing investment in ‘blue chips’ was void for uncertainty). Traditionally, the clause is to be construed strictly with the onus on the trustee to establish that the investment is within its scope. Hence, in Bethel v Anderson a clause offered the trustees a wide discretion to change investments ‘from time to time’. Jessell M.R. held that this did not enable the trustees to make certain speculative and substantive investments of a type substantially different from the investments chosen by the settlor before his death. Nevertheless, and as demonstrated in Re Harari’s ST, the court will strive to give an investment clause a plain and ordinary meaning. In that case, the settlor gave his trustees the power to invest trust money “ in or upon such investments as to them which may seem fit” Existing investments included certain Egyptian binds and securities, which at the time, were not authorised investments. The court had to determine whether the express power was to be limited to the statutorily permitted range of investments or whether the trustees could lawfully invest outside that limited range. Jenkins J could see no justification for reading into the clause such a restriction and added, “I think the trustees have power, under the plain meaning of those words, to invest in any investment which...they ‘honestly think’ are desirable investments...”
The Trustee Act 2000 Unless the trust instrument contains an express investment clause, the power to invest is now widened and regulated by Pt II of the Trustee act 2000- regulation is retrospective in application. The so- called ‘general powers of investment’ is set out in s.3(1) which authorises the trustee to make ‘any kind of investment that he could make if he were absolutely entitled to the assets of the trust’ The statutory power can, however, be modified or excluded in the trust instrument. An investment for these purposes requires an anticipation of profit or income (e.g. granting a mortgage on terms that it will be paid with interest) and ‘investment of the trusts’ refers to the ‘assets if the trust’ or the ‘trust fund’. This power does not extend to investments in land (except loaning money by way of mortgage) as the power to invest in land is specifically governed by s8. The new Act does not restrict the trustees to listed investments, power is broadened to facilitate any investment Standard investment criteria and reviews Trustees when exercising the statutory power of investment are required to have regard to what are styled ‘standard investment criteria’. S 4(3) (a) requires the trustees when making any investment or reviewing existing investments to have regard to the suitability of particular investments. This will involve consideration of the extent to which the investments are appropriate in the light of the nature of the trust and the needs of the beneficiaries. S 4(3)(a) also emphasises the need for diversification and this is designed to ensure that there will be a range of investments and a minimisation of investment risk. Trustees are obliged by virtue of s492) to carry out periodic reviews of the investment portfolio and, if necessary, vary the investments. The duty to review applies equally to an investment which is settled on a trustee and one which is purchased by a trustee in the exercise of his powers. This requirement was imposed at common law by virtue of cases such as Bartlett v Barclays Bank Trust Co Ltd. A trustee who fails to carry out periodic reviews will be in breach of trust. For most purposes, an annual review carried out at the end of each tax year will be appropriate. Taking advice S 5 requires the trustees to obtain and consider proper investment advice from a suitable source before exercising any power of investment or before reviewing the existing investments of the trust. The need to take advice is not limited to investment under the statutory power, but applies also to any investment under an express power. The rule requiring advice only gives way when it would be reasonable to proceed without such advice (e.g. if the investment is small or the investments proposed are low risk). S4(5) state that the advice must come from ‘a person who is reasonable believed by the trustee to be qualified to give it by his ability in and practical experience if financial and other matters relating to the proposed investment.’ The advisor must be licensed under the Financial Services and Markets Act 2000. Hence, the source could be an expert trustee or an outside adviser. Although the trustees are not obliged to follow the advice received, if they decline to do so they run the risk of personal liability for any resultant loss. Investment in land Traditionally the trustee could not purchase land as an investment. This rule did not apply where express authority was given in the trust instrument or when such investment was permitted by s6 Trusts of Land and Appointment if Trustees Act 1996. Where there is express authority, land could only be acquired for the purposes of generating an income for the trust (Re Wragg) and not, for instance, to provide rent free accommodation for a beneficiary (Re Power – no income stream from the property so it could not be said to be an investment at all).
The 1996 Act allows trustees of land ( not personalty (moveable property)) to purchase land for occupation by a beneficiary or for any other purpose e.g. a house may be acquired initially for resale at a profit, but subsequently the trustee may decide instead to allow the beneficiary to reside therein. S 8 Trustee Act 2000 is modelled upon the 1996 Act provision and allows the trustee of personalty to purchase freehold or leasehold land as an investment, for occupation by a beneficiary or for any other reason. It does not have to be intended to generate a rental income. It might, therefore, simply be purchased to provide a home for a beneficiary. On acquiring land, the trustee under both schemes has the same powers as would an absolute owner and this allows the trustee to sell, mortgage, lease or otherwise deal with the land. The application of s8 can be excluded in the trust instrument and, if not so excluded, operates regardless of when the trust was created. Investing in mortgages of land S 3 200 Act permits the trustee to invest in land by means of providing a loan secured on the land (i.e. the granting of a mortgage). The mortgage may be legal or equitable – but private mortgages are now uncommon and not an attractive form of investment. Where the trustee complies with statutory guidance in regards to this form of investment, he will be protected as regards to any loss that arises from an incorrect valuation of the mortgaged property. The Trustee’s duty of care o At common law, the duty placed upon a trustee when investing trust funds was higher than that imposed on him when carrying out his other administrative functions. o Trustee must invest the trust property wisely acting as an ordinary prudent man making investments. o CA Learoyd v Whiteley Lindley LJ: “The duty of a trustee is not to take such care only as a prudent man would take if he had had only himself to consider; the duty rather is to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide.” The distinction is framed around the acceptance that a prudent man of business might still invest is risky ventures “ but it is the duty of trustees to confine themselves to the class of investments which are permitted by the trust, and likewise to avoid all investments of that class which are attended with hazard”(Lord Watson). o However, the test is ill suited to developing investment practices. The objective standard of a prudent businessman became relatively meaningless in a complex commercial environment where businessmen display varying degree of skill and aspire to different objectives. o Hoffman J in Nestle v National Westminster Bank Plc advocated the ‘portfolio theory‘ – entails that, as trustees will often introduce an element of diversity in their investment portfolio, they are to be judged on their overall performance and not on the failure or success of a particular investment. “ Modern trustees acting within their investment powers are entitled to be judged by the standards of the current portfolio theory, which emphasises the risk level of the entire portfolio rather than the risk attaching to each investment taken in isolation”. o The standard of care expected of a trustee has been redefined in s1 Trustee Act 2000. o Subject to exclusion in the trust instrument, s 1 provides that the trustee must exercise such care and skill as is reasonable in the circumstances having regard first, to any special knowledge or experience that he has or holds himself out as having – instils subjective element into test. o If he acts as a trustee in the course of a business or profession, regard must be had to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that business or profession – instils objective element into test. o The standard of care prescribed in the 2000 Act confirms that a professional trustee is expected to show a higher degree of care than a lay trustee. A lay trustee who makes investments will, therefore, be judged against a different standard of reasonableness than will his professional counterpart.
Bartlett v Barclays Bank Trust co Ltd – a trust company with specialist staff will be judged on a different level to an unpaid, family trustee – Schindler = case marked “ a radical departure from the single standard of competence expected from trustees”. Bartlett – the trustee bank allowed a management company to invest trust money in two ambitious development projects describes as ‘a very good gamble’. The Bank did not ask for or receive much info about the transaction. Subsequently, the beneficiaries sued the Bank as trustees for breach of trust for the substantial losses that were incurred by the failure of the two projects. The Bank attempted to shield itself behind the management company, claiming it should be entitled to rely on the expertise and skills of the company’s experienced board of directors. Brightman J accepted that there was an element of risk inherent in any investment, but noted that, “The distinction is between a prudent degree of risk on the one hand, and hazard on the other”. This was such a hazardous investment that it should not have been made without express authorisation in the trust instrument. The judge considered the Bank’s position as if, first, it had been an ordinary trustee and, secondly, as a specialist trustee. The Bank had failed in its duty whether it was judged by the standard of the prudent businessman or the skills of a trust corporation. It was held that a prudent man of business would have been more proactive and sought out more info about the activities of the management company. The Bank should have overseen the company’s use of trust money. The judge concluded that the Bank was an expert trustee and, therefore, owed a higher level of care.
Dog Leg Claims Emerged in context of trustee companies and the potential liability of their directors to beneficiaries. Gregson v HAE Trustees Ltd – the beneficiary, G, alleged that the trustee company was in breach of duty in failing to review the need to diversify the investments of the settlement. As the trustee company had no assets, the real targets of the action were its directors. G asserted that the directors were in breach of their duty of care to HAE Trustees Lt and that the claims of the company were part of the trust property of the settlement. She argued that the directors in performing their duties to the company were necessarily performing the company’s duties to avoid losses to the trust and the relevant obligations of the directors formed part of the trust property itself. Under s 174 Companies Act 2006, however, the duties of a director are owed to the company and not to the beneficiaries of the settlement. The duty owed by the directors was to avoid loss to the company and it was a misunderstanding to say that the duty extends to third parties- directors functions relate to trusts administered by the company – does not mean that the duties of the directors can be defined as avoidance of loss to the trust fund. Hence, if a breach of trust is committed by the company, a beneficiary cannot maintain an action against the directors – this could not be sidestepped by a dog leg claim – if the dog leg claim was valid, it would circumvent the clear and established principle that no direct duty is owed by the directors to the beneficiaries. In addition, there is no intelligible legal mechanism whereby the rights of the company against its directors could be said to be held on trust for the beneficiaries of the settlement. The directors are not appointed by the trustee in the course of the administration of the trust. Instead they are appointed by the relevant organs of the company. In no sense were they directors engaged by the trustees of the trust. Consecutive Interests Consecutive interests – where there is a tenant for life and a remainder man – the trustees are under a duty to treat income and capital beneficiaries in an impartial manner – duty to act fairly between all types of beneficiary. The trustee must ensure that a fair balance is drawn between high income and high risk investments and those safer and less lucrative investments that will preserve the capital. Hoffman Nestle v National Westminster Bank plc “ The trustee must act fairly in making investment decisions which may have different consequences for different classes of beneficiaries“ Nestle – the settlor left £54,000 in shares on trust for his widow for life and thereafter for his children and grandchildren. Eventually, his granddaughter (as remainder man) became
entitled to the trust fund (then worth £269,000). The investment portfolio had throughout been managed by the Bank as trustee. Thee granddaughter claimed that the Bank was in breach of trust because it had mismanaged the trust investments by failing to diversify and to review the portfolio. She argued that, had the Bank not acted in an overly cautious manner, the fund should have been worth more than £1 million. CA determined that the Bank was not in breach of trust, even though it had misunderstood the scope of its investment powers, failed to conduct periodic reviews, did not diversify effectively and had shown symptoms of ‘incompetence and idleness’. The trustee had nevertheless satisfied the required standard of care. By the undemanding standard of prudence, the Bank was not shown to have been in breach of its duty. The granddaughter failed because she was unable to show that “the trustees made decisions which they should not have made or failed to make decisions which they should have made.” As to consecutive interest, the trustees had attempted to balance the income needs of the tenant for life with the longer term capital interests of the granddaughter. It is for the trustee to reconcile this conflict of interest. The trustee has merely to maintain a fair, impartial and equitable balance between the two, although this does not require the interests to be evenly balanced (court held that at least 50% of investments should lie in ordinary shares issued by companies – these investments are safest.) Non financial considerations The duty of the trustee is to act in the best financial interests of the beneficiaries. This entails that the trustee must obtain the best rate of return available coupled with diversification of risks. This is so even where it is against the political, social or moral views of some of the beneficiaries. Cowan v Scargill – the investment policy of the mineworker’s pension fund was challenged. The fund was managed by 10 trustees, half of whom were appointed by the National Union of Mineworkers and the rest appointed by the Coal Board. The dispute concerned investments in foreign energy companies. The trustees appointed by the Trade Union objected to the investments on the ground that these companies were in direct competition with the domestic coal mining industry. HC held that the trustees had to act on the best financial interests of the beneficiaries and, hence, that they would be in breach of duty id they failed to invest in the overseas energy companies. The trustees, therefore, had to put aside their personal interest and views – if investments that go against trustee’s social and political views are more beneficial to the beneficiaries than other investments, the trustees must not refrain from making investments by reason of the views that the hold (Mergarry J) Farrar and Maxton – stance adopted by Mergarry = rigid – pension scheme was not an ordinary private trust, it was an extraordinary trust with certain public characteristics set up under a scheme for nationalization – aim to develop the industry in the national interest and safeguard the welfare of employees – perhaps overstates the nature of the trust and overlooks the fact that the primary aim was to benefit individuals. Important to appreciate that ethical investment is not prohibited by the decision in Cowan – financial benefit is not paramount but it is still possible for the trust instrument to sanction ethical investment in certain companies. However, where beneficiaries allow, trustees may retain the ability to choose ethical investing when the financial returns will be equivalent to an alternative, ‘non ethical’ portfolio. Charitable trusts – modified approach adopted – trustees are entitled to decline investments that run contrary to the objectives of that trust. Nicholls V.C. Harries v Church Commissioners for England – “There will be some cares...when the objects of the charity are such that investments of a particular type would conflict with the aims of the charity e.g. cancer research companies and tobacco shares” However, the trustees cannot totally disregard the financial implications of their restrictive decisions making – charitable trustees are not allowed to pursue a blanket policy of ethical investment if thus would be detrimental to the value of the trust fund. Investment and charitable trust Powers in regard to investments = broadly similar to those of private trustees.
S3 TA 2000 only assumes relevance where the trust fund is so substantial that diversification of investment and the associated professional costs can be absorbed. However, TA 2000 may be unsuitable and inappropriate for smaller charitable trust funds – s24 Charities Act 1993 and the Charity Commission have devised schemes (“common investment schemes”) for these types of trusts – they allow participating charities to have their investments pooled under the control of management trustees appointed by the court – aim = to allow separate charitable trusts to be combined into one scheme. S 24 provides that such a scheme can be devised on the request if two or more charities and this remains so even if the trustees are the same person. Wilberforce RE University of London Charitable Trust “ The result of that would be that the university has power to consolidate any other charitable trusts of which the uni may might become trustees so as to be part of the combined pool without coming back to court...” Alternative strategy – charitable trustees can apply for authorisation of a “common deposit fund” which allows the funds to be pooled and placed in an interest bearing account.